Friday, July 15, 2016

Nice, France is pathetic.
It is not terrorism in terms of cells and planning and a long term
steady strategy to some anti-state status, likely with the replacement of the
state with another. In this case the
Caliphate.

September 11 was terrorism which required a long term setting to be able
to plan and then execute the attack.
That is why the USA righteously and within law – as near majority of Congress
shows – attacked Afghanistan and then Iraq. The Iraq
War legitimacy has nothing to do whether it was effective or a strategic error, it was specifically
authorized as per US domestic law and received support from all of NATO but
for, ironically, France. It was "right", it was to remove the setting for another attack against the USA. And this seems to have worked.

Nice and Paris 15 was not such an attack; in fact ISIS is now
scrambling to find if they should lay claim to Nice. Bouhlel obviously acted on his own.

The truck driver Bouhlel was a pathetic coward who sought a
way to die such as he could not fail his code and psychosis, as he would undoubtedly have done so, if
he just leaped off a building. He is
likely psychologically dysfunctional – my guess is narcissism where he has to
be against all proof the center of all, even his death. And this results in incredible carnage which
is even more stunning considering how pathetic the actor.

And the arrogance and lack of protection from the security
and defensive functions in Nice is stunning.
Where were the 5 ton pots of concrete, perhaps with a tree in it for décor,
which are dropped off in access to all public gatherings to a stop truck or car bomb, or this pathetic suicide that simply drives a truck at a rather slow
clip down well over a 1 kilometer esplanade. That was clearly a failure of the state, to anticipate the Bouhlels.

“[Perverse] unreason has its own
logical processes”

Conrad “The Secret Agent”.

Conrad gives the key. What are the “logical processes” that allowed
Bouhlel to commit such evil?

The best study of evil that I
have encountered – I reject Arendt idea that evil is banal, especially if institutionalized
– is Gitta Sereny’s “Into That Darkness” which intimately examines Franz Stangl. She points out that monsters like Bouhlel via
the Stangl examination require to be educated:

“But what is important is that it is hard to see in this
instance what they have to gain by denying that they had been “schooled” for
murder at the euthanasia institutes, if that in fact was what happened. They
would surely appear in a slightly less terrible light if they could claim that
they had been scientifically conditioned – brainwashed – to death-camp work,
rather than assigned to it because their natures seemed particularly suited to
such activity.”

And, that is the process required to turn a pathetic Bouhlel
from committing some evil act, perhaps a murder suicide of his wife, versus
feeling justified to try and kill 84 people in a most mundane manner, simply
driving leisurely down a road, so as to pay honor to his evil psychosis. And that is what is also pathetic, that
Bouhlel requires such a justification to provide a more complex setting for his
demise. That at his core Bouhlel is a
moral man requiring a reason to commit such evil. And he requires to be
educated in evil.

And it is this line the state must work upon, the need for
Bouhlel to justify his actions and the education required for him to acquire
that justification. And then the key
question as to why was a Bouhlel not brought to the attention of the state by
someone close to him?

For in the end the only way to stop a Bouhlel – once he is
educated and reached a certain level of psychosis - is to have those in his proximity to cough him
up, to expel him from their group.

Winnie Verloc in “The Secret Agent” is an excellent sketch as
to what is required. Once Verloc
settled on using the simple Stevie as his vehicle to deliver the bomb, Winnie
ended killing her husband, Verloc, over his use of Stevie. If she had known what Verloc was up to then
she would have killed him before he got Stevie blown apart.

The core to Islamism is a sexual dysfunction which shows most
in ISIS with their sexual slavery and pedophile policy to reward the “holy
warriors”. Furthermore, the founding
intellectual father of Islamism, from its roots in the Moslem Brotherhood is Sayyid Qutb who during the process of his
religious education ends up at a church in Arizona where he becomes convinced
by the lasciviousness of the Americans – who danced slow and listened to Jazz –
returns to Egypt with certainty as to who the core “Satan” was that was
required to be eliminated for the Caliphate.
While it could require books and books to examine what I just said, it
is at its core a sexual psychosis that dropped the Twin Towers, that allows
ISIS to assist in the current terrorism, to crucify children, for Saudi Arabia
to lop the heads off women for adultery.
And for Bouhlel to kill, now at, 84 people.

Therefore it is the women associated with Islamist that are
the required defense of the state. All
wives and sisters and daughters of the Islamist must be turned into a Winnie
Verloc, to have a cause or belief that is beyond the sexual psychosis that is
permissioned and core to the Islamist.
If Winnie Verloc had an opposing education that Verloc had received to
justify his acts, then she would have stopped Verloc cold before he implemented
his terrorist attack. And if Bouhlel’s
wife had received a counter education then she would have likely turned him in
to the state prior to his truck drive.
The state must recognize the centrality of sexuality to the Islamist
terrorist and empower the Islamist female body to protect themselves, for it is
not the women nor her children or everything she holds dear that goes to
Paradise after the terrorist act but lives in desperation after her husband,
brother, son, or father commit such acts.
And this education must be provided before the Islamist can seduce and
co-opt associated females so they are either the actual bomber or accomplices.

The state has every right to insist that given your presence
within the state you must subscribe to the state’s curriculum of
education. Just as all children are now taught
to be aware and ready for pedophiles, the young girls must be educated and
indoctrinated that the temporal state is the sacred institution and that the
afterlife is for another time and state.
That to harm the state will not only bring them great harm by
association but also their families.
Furthermore all children must be educated in feminism, such that when
the make’s close to them claim religiosity to allow their misogyny they have
both the education to identify what it is and also have recourse in terms of
leaving that association so as to enjoy their “inalienable rights”. The state cannot abide or stand misogyny or
inequality between genders as per a false sense of cultural relativism – all women
must be educated, no matter what creed or culture they are born within and live
with as to the merit of feminism and how it is the state that secures equal
status for them. All women must be
liberated under the protection and education of the state. The state must remove the hijab, prohibit the
burka, bigamy, primogeniturship, asymmetrical divorces, honor codes – basically
prohibit Sharia law as per its application. This is not a matter of idealism, this is simply a
matter of protection of the state from the Islamist Verloc’s and to generate a
defense of educated Winnie Verlocs.

This is so important that the state must insist on this
within their sovereignty but also insist upon it to any interacting state. My read is that this is as slavery was in the
days of Wilberforce which perhaps his thoughts were used by the UK to extend
the empire, it still ended with a global adherence to the illegality of
slavery, and to have slavery the state would be a pariah amongst nation. So too must be the global standard for
feminism where to provide anything less than full liberation and equality
between the sexes is a crime against humanity.
While I understand that this is thought to be impossible by most, that
the Wahhab of Saudi Arabia have their right to enslave women, but the civilized
world thought the same for slavery in the USA and Saudi Arabia – a province of
the Ottoman – but still Wilberforce laws turned that acceptance even to the point
of perhaps being the root cause of the US Civil War.

But certainly the state can insist on such standards within
their own borders. Since the
Enlightenment and even before with the ideals of Aristotle and then Machiavelli,
it has been realized that the state is required for any protection and
advancement of the human ideals and freedom.
That the Islam idea of a heaven on Earth and the “Caliphate” leads to
misery. That the state is the vital structure
to protect mankind from the shared innate evil so as to allow the enjoyment of
rights and liberty.

It is this, the centrality of the state, which causes such
hatred from the Islamist for france and the USA. It is the state that broadcasts its “exceptionalism”
to all mankind that is the dire enemy of the Islamist, and which in the end
will make them extinct. And by doing so
in effect killing God.

The failure of the state insisting on full realized equality
for the sexes is why we had such evil visited upon Nice – and it is only via
education to counter the education of evil Bouhlel receive which in the end
will be the protection.

Since the state is in itself adequate legitimate reason for
the state to do anything in defense of the state, it is legitimate to eliminate
the education Bouhlel. To see it as an
education and not as a cultural norm.
The state should seek out all the anti-state educators of the Islamist
and liquidate them. All Friday prayers
should be monitored, all material that is sent to the Islamist anywhere in the
world must be intercepted. The imam’s or
scholars or leadership that are the source of this material must be eliminated
as quickly as possible. The standards to
decide who or what is an enemy of the state is any content which encourages or
supports an attack upon the state via violence or destruction or can reasonably
be perceived as leading to that. Under a
state of emergency, the sovereignty of France is justified to not provide
habeas corpus but to take immediate action against such actors so it is
impossible to educate a Bouhlel to an institutionalized Stangl like evil. It is not bombing Syria or taking military
action or punitive measures to the ISIS rabble – though I do think that should
occur for other reasons -it is to disrupt the education of the Bouhlels that
must occur.

Wednesday, July 13, 2016

What is obviously the most important factor in today’s
markets is the move to neg rates amongst sovereign borrowers. The initial read by risky asset investors
(SP500, FTSE, DAX and so on) is that this is akin to leaving a middle school
class unsupervised and it is felt that a “Goldilocks” environment is occurring with
the central banks providing unusual liquidity via low rates and communicating
that they are determined to keep rates low, no matter what, using some shibboleth as a factor always will make central to all
policy. Trouble is this shibboleth is now changing from quarter to quarter. While at first this shibboleth
was employment yet as employment fully recovered in general it then shifted to
various subsectors of employment, like labor force participation, and then even
further to arcane small groups which while might be of solid societal and
worthy objectives is meaningless to the national focus of a central bank, but
perhaps for gaining PR to keep an ever intruding congress at bay. But as it is impossible to find any monetary
concern with employment now in the US – in Europe there is an ongoing crisis in unemployment,
but that is a completely different concern as given below, and Japan there will
always be full employment given the deliberate racist xenophobic national
policy which combined with more of my thoughts below has generated a negative
aging demographic rate.

So the concern now, or the empowerment, of the central bank
policy is an inflation rate not being at an assumed rate which is required for
maximum growth of the economy as being part of the NGDP – which is real GDP
plus inflation. This NGDP is daily “priced”
as a natural rate, which is not clear until often years after the fact but the
central bankers take a stab at it and say it is “here” which as far as I can
gather is intuitively arrived at by a wise old woman. It smacks of the failed “P* “ of Greenspan
just that the Hayek/monetarist Greenspan equation on the right side is replaced
with a “New Keynesian” Woodford based equation with Wicksell replacing the
Fisher ideas on the short rate. The
idea is that if the central bank keeps Fed Funds or the central bank rate below
this ‘Neo- Wicksell” (Woodford) rate, the “spread” accumulates in the banking
system in a “cumulative” cumulative way but in an account or accounts that is
really not known or measured. But Yellen
carries on in good faith knowing this accumulation is adding up, somewhere, and
sooner or later banks will just gotta lend the money out and we break the “stickiness”
of the wages to output gap or employment.
Prosperity then returns to the like of Yellen’s honest dad back in the
day Brooklyn, wages go up and everyone is happy. The problem with this idea is
that there is about 2 ¾ trillion excess reserves in the system that has driven
M2 to record levels and velocity (GDP/M2) to record lows. So this Wicksell accumulation has a long wait
before it is ever required or even identified in the system, and as Japan shows
may never see the light of day if there is substantial QE overhang. The other problem with Wicksell is no one
knows the Wicksell “natural rate” which the CB rate must be below to build that
accumulation and so most of the CBs, and stated as such by Yellen, is to spice
it up with a dour acceptance of “secular stagnation” thesis. This combination of placing faith in the
cumulative Wicksell policy with the secular stagnation drop in the innate GDP
of the nation creates a bad loop for as the accumulation never can be seen,
certainly not in increased bank loans, the answer is drop the natural rate
lower until the wall of negative rates is reached, or zero rates – the ZLB or
ZIRP – and the secular stagnation thesis is used to drop the “natural rate”
lower and lower. This is in the short a sketch
of the NeoFisher ideas of the negative loop of dismal long term GDP such as
Japan has experienced for 17 years now.

But be that as it is – and there is a debate about whether I
have a grip on the things above – the inflation rate is the last remaining
variable which central banks can use to explain their current policy.

And I use central banks in plural as there is obviously
either a “conspiracy of commission” or a “conspiracy of omission” amongst
all the major “independent” central
banks to explain what is either by happenstance or by coordination in lock-step. This now allows the central banks to add the
international “uncertainty” as an added concern to explain their “perma-zero”
policy. And uncertainty is terrific as
it is impossible to debate what uncertainty is as it is a “know it when I see
it” variable. Actually it is not an
uncertainty but a quality that is faith based.
We have to have faith that Yellen can discern uncertainty which is a
national serious concern. “Faith based”
monetary policy.

I will not go much further into whether or not the “Neo
Wicksell” or this binding of the worlds larger central banks into an
extra-national entity outside the oversight of their governments. Add the IMF into the pot and you have the
true Bilderberg Group – only these folks do have massive power, make policy,
and implement.

The problem is there are not shared characteristics between
these central bank’s national characteristics such that even if their
coordinated action was a virtue, the results are guaranteed to end in
rancor. Sooner or later one of the
central banks will have to split ranks and to achieve their new objective will
have to surprise their now brethren and shaft them terribly so they can achieve
escape velocity from this coordinated action.
They will have to do this as they realize via national results that the coordinated
action is a detriment to their specific countries. If they stay in the group, they will go over
the falls and all of them can stay in touch after they are dispatched to the academic
penal colony they will be sentenced to by their people.

So it is worthwhile to consider the very large differences and
what will be the motives for this central bank brawl that is surely to come.

Japan’s problem has nothing to do with an output gap or employment
or even inflation or disinflation. Japan
is a failed mercantilist state which was allowed to rig the Yen to levels such
that every American was eager to buy a high quality Japanese good for, from
their perspective, was about 1/3 less of a cost that American goods. One could by a Honda Civic which though a
compact car, the door would close with a solid thud as if it were a Cadillac in
comparison to the tinny J Car or K Car or other dismal post 70s crash products
made in the USA. Japan was allowed to
jam this product into the US as it was quality stuff and more importantly the
US was keen to appease Japan given it was then the US security bulwark against
the still threatening USSR. Ironically
China had the same status and for the same reason, but their goods sucked. Well as USSR fell apart and given that the
US had 40,000 military occupying Japan, the USA under Reagan headed by the
tough guys Baker and Schultz, gathering other concerned parties, tool a mere 2
hours during a weekend meeting at the NYC Plaza Hotel to simply decimate Japan’s
terms of trade, a destruction that ended with the Yen at lows of 70 Yen. Ever since then, Japan moved production to
the USA but that wasn’t effective enough and in 5 years Japanese stocks plunged
and never really regained their footing to this day. Japan never really gave up the mercantilist structure
to their export led economy to this day as the “phantom Zaibatsu” structure,
though weakened, continue to this day.
All mercantilists require a savings either in the public or private
sector, it is a matter of identities that must occur to maintain the false
currency levels required to gain exports.
When the UK did this a cheap Sterling was not required as their mercantilism
was maintained by power – a British man-of-war would show up in your main port
if you would not transact. They then
could re-cycle their mercantilist gains as profit as the goods were sold with
appropriate true profit and still – to this day – be one of the largest
reserves of savings only their “sovereign fund”, since it did not have to be
maintained in identity form to keep Sterling cheap was dispersed through the
system as per the traders entity into the private sector. Japan had no choice, though they did place
the profit in the private sector but in quasi-public sector oversight at the
post office or the Zaibatsu banks. And
much of the export profit, especially if made during the days of 180 plus Yen,
in US Treasurys where they become “Croesus Gold” and as they could not be used
they immediately they acquired their true valuation if invested in dollar
private sector assets. Since Japan has
yet to make the turn to a domestic consumption based economy.

Furthermore Japan has maintained a core racist
xenophobia. When my sister had her
second kid born in Japan, almost immediately two blue suited government home service
guys showed up and made her – still groggy – sign several forms which
memorialized that her new born could never be Japanese and had no rights to
Japanese citizenship. And given the focus on savings and severe caution by the
Japanese citizens the desire to make babies is not there and Japan has a
negative population growth. The
limitations of the large near SOE have, after access to the US buyers, dropped
productivity as the incentive to produce the “Walkman” or the next form of
video drive dropped away as the high savings Japanese did not provide
incentive. Apple then stepped in and replaced
Sony not only in the USA but around the world.

This ends in Japanese low growth and lack of inflation a
structural problem which the BOJ policy since 1990 not adding anything but for
gumming up the works and adding sclerotic risk. And there is a NeoFisher effect
ongoing which given the labor force growth plus productivity adding to a low
fractional to one percent potential GDP has the BOJ ease and QE end as disinflationary. The only solution to Japan’s dismal post -mercantilist
stagnation is to implement policy that is beyond the powers of the central
bank. That would be anything that would
shift Japanese population growth plus productivity plus inflation to 3% or so,
or a targeted NGDP of 3%. The central
bank, once such policy shift is decided upon, must move the bank rate to “catch”
this goal which is to raise the bank rate, despite all immediate concern, to
2%. But that can and should be done only
when such policy appears. Since such
policy changes is anathema to Japan now, such as significant immigration and
citizenship granted to those in Japan now, some for generation, Japanese
citizenship. And entrepreneurs must
appear as they are in Silicon Valley and much larger Gini Coefficent – perhaps
by tax credits and the like. Since this
means the dismantling of the base to
their powers of both parties – I do not think this occurs. Japan is doomed and the above will appear but
likely with a resumption of the extreme violence and social unrest experienced
in the 20s and 30s and 70s. This may
never occur as it is in the interest of the USA to keep the Japanese as they
are, deep down a ward of the USA. What
is important to the Fed – and this is about setting Fed Funds policy – is there
should be no cooperation or coordination between the Fed and the BOJ. Japan as far as monetary policy can via such
cooperation and coordination – visits from Bernanke which no doubt end as a
Clinton to Lynch private jet chat – all ends up back in Yellen’s office. The only end results of any monetary cooperation
with Japan is to be visited by a parasite which will be damn hard to get rid or
an actual cost as Japan’s BOJ uses a thoughtless Yellen as a life raft. All interaction of a monetary nature,
considering what slow burn crisis state Japan is now, has to be the State
Department or the Defense.

The other cabal member – the ECB – has a completely
different set of problems that are not at all like Japan’s. So it is an error to see the low ECB rate and
their easy policy which is like Japan as any sign that it is the same problem.
If Europe is aggregated together without regard to the member country units, EU
and the subset EZ is in very good shape.
It is the form of the current aggregation which is causing all the
problems such that Brexit occurred.
Europe in in the midst of a long running constitutional cris, ie there isn’t
one. It is impossible for the treaties to
be a constitution. Not to get into an
description of the current aggregate level of governance is crypto-fascist
devoid of representational government or democracy, it does boil down to the
fact that the ECB is not a federal empowered institution and no matter how much
it is funded it is impossible for the ECB to implement useful monetary policy
but only provide a placebo. Kissinger’s
quip on who do I call at 200 AM in Europe for an emergency is the same situation
for Yellen – any interaction with Draghi is just a feel good moment to confirm that Yellen
is a tribal member. Since the ECB cannot
impact things like money supply or ever act like a lender of last resort, and
all they can do is window dress with small time problems like Greece and
Cyprus, Draghi ends as the front man like the bought Senator in the Godfather
who says the pretty good things so mendacious unrepresented governance can
continue which right now is Germany, all Germany. So the low and neg rates have
merely replaced the virtuous effect (for Germany) of the Euro which allowed
them to pillage the rest of Europe.
Draghi had some windows of opportunity at times when the smaller
manageable crisis of Greece and Cyprus would have allowed him in the court of
public opinion to shift to a Hamiltonian way and leap past the Target2
fettering of the ECB to be a mere currency board for a confederacy, and become
the first true federal body in the EU, and thereby define a nation and gain a
central bank’s seiniorage – which now he does not have. But that would require to do as Hamilton did
and either convert all EZ debt into a Euro bond pricing all at the same price
of par. If that had been done at the
time, it is my belief that Draghi would have withstood the rage of the First
Ministers (ie Merkel), the EuroGroup, and other current powers of Europe
cloaked under the greasy ideas of “competencies”. So the low rates in Europe are not at all
similar to the low rate in Japan but like Japan they forecast a failed economy
as the ECB has no real power and is not a central bank. It is a constitutional crisis.

The UK is also experiencing low rates but they so seem to be
coming out of the crisis and starting to forecast steady and adequate growth. Yet Carney seems to be part of the Wicksell
pact and also is quite willing to assume the Home Office job and will use the
independence of the BOE to circumvent UK government oversight and stand ready
to ease further for the “uncertainty” of events like Brexit. He does seem to be an “internationalist” and
I don’t think he agrees with my view that there is distinct very different
reasons for the low and neg rates specific to each country. SO by seeing a common Wicksell reason he is willing
to coordinate and cooperate with the other central banks and accept the thesis
that there is one common problem. A “tell”
is his high regard to the international banking community, for the IMF and the
ECB.

Finally, even before Fischer but especially after him,
Yellen either perceives common cause with the other central banks or she has no
problem to use this international problem shared by all to now be the key
explainer to her maintaining emergency powers and apply extraordinary emergency
measures, for she has run out of justification to keep this powers as there is
clearly no emergency and no need for extraordinary rates and policy.

So this stiches together about 60% of the world’s GDP into
one synchronized rate structure that varies only by small differences in
yield. It then gives the appearance of a
global economy and such coordination and thereby never stronger or more
influential central bankers to claim new powers or keep the extraordinary powers
recently granted. This is a grave danger
to all these economies for a major bulwark to contagion and general global
depression is that the world’s central banks pursued a policy that was strictly
based on the specific domestic economy or their homeland.

If this is more about maintain powers of the central bankers
and keep themselves in the limelight than reasonable monetary policy then
sooner or later the realities of the US economy will blow this group party into
shards. For in the end the US economy is
all about corporate profit as it is a capitalist market based economy where
savings and net worth and even annual revenue dwarf the Federal Reserve. But for a long time, especially if in cahoots
with the other central banks, the rates can stay low or even go lower.

The large spectra overhanging the market is the thesis of
the NeoFisher school of thought which says that there is feedback, a system
where if rates are held for long in proximity or at ZLB, the Fed Funds rate
will end being the NGDP for that immediate time based on the straight forward
Fisher Rate of real GDP plus inflation equals NGDP or in instantaneous space, the Fed Funds
rate. That is s as long as the true NGDP
doesn’t shock or cusp jump the Fed Funds rate no matter what the Fed wishes to
the equilibria Fed Funds. Right now that
is the Taylor Rule 2%. Being a jump that
means sudden explosive reshaping of the US Treasury curve.

While I think the USA can withstand this shock as if it
occurs it is based on explosive real growth and an inflation jump due to excessive
liquidity of this extremely low Fed Funds rate on the search for this mythical
Wicksell natural rate.

So all neg rates and low yields are not at all there for the
same reason, even though central banks are relaying it is a shared reason. But for Japan, all these low rates are due to
a setting which thoughtful women and men can rewrite and change literally over
a weekend, just as the Plaza Accord changed all. Japan though is mired in racism and
xenophobia and become inured to chronic de facto slow burn depression.

And the NeoFisher thesis could allow Yellen to perceive of
explain that there is a secular stagnation condition. She already has for 2 years now. Her pursuit of the Wicksell “natural rate”
has ended as – I hope – a short term crisis which has curtailed NGDP by about
2% for two years, or a cumulative 4% of NGDP or about 800 billion and about 1% to
2% unemployment.

So why are all the world dates low or even negative? Well Japan are racists, ECB is a façade as
there is a raging long running constitutional crisis in Europe, because Carney
wants to be chic and stay in power in the UK and for the USA because Yellen is
one of the most susceptible to peer pressure of any high ranking US office
holder or she is a rascal. What is
certain is all the reasons that are behind low rates could all leave swiftly
and the root cause is imposed coordination of the central banks.

Tuesday, July 5, 2016

An economist who always produces thoughtful and important input is Stephen Williamson at the St Louis Fed. Williamson has been one of the main voices for "NeoFisherism" ideas on monetary policy. Best to let him explain as it can be complex and his best work is on his blog: http://newmonetarism.blogspot.com/

I have always suspected he is the source of Bullard's material for several years now, just Bullard is a wee bit wily and does not go down the straight road on Williamson's stuff, so it comes out somewhat bizarre at times. The first notice I had of Williamson was Bullard's "Seven Faces of the Peril" paper in 2010 which had this iconic eye opening graph:

Now I have crudely drawn a dotted line which I feel is the US Fisher Rate, with the US higher productivity and our dynamic immigration policy (no matter the "Wall"), and this graph in 2010 has shown to have great prescience if not almost perfect foresight.

I think Seven Faces is a must read now to try and figure out how a 2 1/8% long bond (!!!!!!!) can co-exist with a 2050 to 2110 SP500. It wont for long as it is an explosive unstable relationship. The graph shows that while the Fisher Rate is linear being a an additive of real GDP plus inflation [ FR = GDP + i ], the Taylor Rule has two coefficients which make it geometric. Once the Taylor Rule gets past the 2% area or so - the base rate - it flattens out so our habit is to see it as linear as well. That is why Yellen is set to go to negative rates as she sees her Taylor Rule version as linear and feels there is a Wicksell "natural rate" which is dropping a la Larry Summers but is still positive so all she has to do is drop rates and stimulus is provided.

However if the Taylor Rule rate is not linear but geometric as Bullard depicts in the slide above, and if the Taylor Rate maximum convexity is near or at the zero rate, then there are two equilibriums, one depicted by Bullard at or slightly less than 0 %and the other at or slightly above 2% . The lower equilibria, further more, acts like a "strange attractor" - ok ok, not "strange attractor" just an "attractor" (just from time to time it is fun to say stuff to suggest you were "3rd at Poly Technique" and lay on the French accent), that induces extreme stickiness. Or this can be seen as the standard Keynesian "Liquidity Trap" just with more nuance and more power to describe market behavior.

The end results is the central bank becomes a self fulfilling prophet. It is worried about disinflation and the inability to induce a targeted inflation rate so it drops rates seeking a standard Wicksell like response, but instead the short rates get sucked into the lower of the two Fisher-Taylor equilibria. To reach self fulfilling prophecy as a college student is not usually a big problem - you just get kicked out. But if your self fulfilling prophecy is that you think the US economy is and will be a lack luster here on - especially clear by Larry Summers - then that is a very serious issue if you actually have the largest book in the world to act upon your prophecy. Some kids of Munchhausen-by-Proxy moms do die. Then when every important word central bank is doing the same thing you have a world class crisis. Which is what is going on now. A central bank "gone wild"

This is a crisis of the first order. But first we must take the kid - the global economy and especially the US economy kid away from the Munchhausen by Proxy mom.

But this is not new, this ZLB two equilibria and chances are we would be able to break free as the 18 trillion economy gives up on the Fed and simply gets rid of the Fed as the Road Runner dispatches the Coyote.

As John Taylor quipped last year when discussing the reluctance of the Fed to follow the Taylor Rule as "this time it's different" ; "last time I checked US corporates still seek profit". Minsky with his Kalecki-Levy input would agree.

But there is another major factor going on which might make the world's central banks coordinated drop in rates even more of a Bullard "Peril" and that is the binding of the "safe assets" from their scarcity via the repo markets. Most roads in trying to figure out what is going on in US Treasurys end up on the repo desk. "Repo" guys are really the Titans of the US treasury market, followed by the layering of optionality onto risk free - the mortgage guys - and then finally the usual pricing of yield based on the future prospects of the US economy via a spot Fisher Rate and it forward values. Now the optionality guys are off the market given the core source of the 2008 crisis were mortgages. But the repo inventory is greatly depleted, mostly in the USA but it is a world problem.

As the NeoFisher two equilibria and the suction to the lower equilibria occurs, becoming ever more powerful trap that is hard to escape the lower the rates go, is then combined with the scarcity of "safe assets", the lower equilbria then creeps down the yield curve like a contagion making all maturities stubbornly sticky the lower they get. Then the "Peril" of what was a monetary policy issue becomes a national economic crisis for the Fisher Rate will "prevail" and in the end, after it is all said and done - the long bond rate will break down to GDP plus inflation. At a 2 1/8% long bond that is a very grim forecast, a massive "Peril". It explains easily Japan's two now going on three "lost decades". It is simply untenable for the USA, and it is untenable for the world to to have the USA enter into a lost decade, which at this rate is only 5 more years to go for decade One.

The conclusion to Williamson's "binding" paper.

Whats to be done?

First Yellen must go, as quickly as possible. She is more dangerous given the thesis of the "Perils" than a Miller or the 1936 Eccles Fed Chair. She is a world danger now. [That is if the NeoFisher ideas are right - otherwise we just stomach the secular stagnation to come. Isn't there sorta a macro Pascal Wager here when NeoFisher is equated to the concept of heaven?] Then we pick up where Bernanke ended, we get rid of the binding which means reducing long duration Federal Reserve assets bought during QE. An end of the reinvestment program and mortgage prepayment rolls would be a good start. Then a small amount, say, of about $500 billion QE is sold until the repo market frees up and we have a range of about 1% between specials and general collateral. Once that is digested I think the underlying economy is strong and has several years to go prior to peak of this cycle, so a shock raise of 2% in Fed Funds is in order. This of course would kick off pandemonium but no more so since the last time the Fed Reserve had a massive policy error which was during the 1970s stagflation ending with the Miller Fed who was replaced by Volcker. We survived the needed remedy then to Federal Reserve error and for a trader or arb it was a terrific time.

But I am afraid Yellen is having early morning calls with her gang of fellow traveler central banks, all of them - BOJ, BOE, ECB and even secret patch-in of remaining Bundesbank fellows. As they become more and more emboldened by their mutual adulation society, they will become more intractable and will not be the first group of economists to lead the world into ruin given their supreme shared confidence.

So that is why I think Yellen has to go.

Now to bring this down to day to day - what is the portfolio manager to do?

We do not think that there has been any "alpha" in the market for some time now, and it is especially important to recognize that now given this central banks gone wild world we are in now. A keystone for our approach is to use long duration US Treasurys as an offset to adverse movements in the risky assets, but we cannot use them now considering the unique richness in their price from binding. It is crucial to take bets off the table and keep the portfolio simple and seek negative correlation, or as low a correlation as one can find or anticipate, Correlation dynamics is far easier and reasonable bet to place than to predict what is going to happen to consumer cyclical. Now is not the time to have any opinion on single names. Dropping the portfolio's co-variance is the name of the game now. And while correlation is a reasonable place where a manager can place a bet, volatility still has the unique value to the portfolio manager of being prescient, or rather "persistent". If your portfolio manager or traders are not deeply concerned with what the current yield in the 20 year US Treasury means or are scaring the heck out of you talking about post-Brexit trades or similar foolishness, seek me out. What you read above is what I do.

Monday, July 4, 2016

While all eyes are on the beach [Brexit], the great white shark from the movie Jaws has entered the pond [US NGDP]. I think that Brexit is not at all, from an American portfolio managers who has American assets, a serious issue. Contagion after 5 years of imposing stress tests on the US banking and financial industry and with Basel III implemented - while there may be globalization of investing, crisis going forward will be regional but for those which pose a threat to US national security.

Every week we publish a detailed report on the US Treasury curve (using 20s less 5s given the data availability as Fisher took a divot with shutting down the 30 years for a while) and derive the future growth in the US economy from that data. Right now it depicts an extraordinary situation.

While I think the over-all conclusion from this report is that the US Treasurys curve and rates are the results of one of the more entrenched long running policy error in Federal Reserve history, we have to respect the bizarre several sigma results it shows.

This Fed Reserve error is the continued low near ZLB rate despite the economy showing normal growth. And this is compounded by the large Fed balance sheet from QE II and III. The large amount of excess reserves shows that while the first $1 trillion of QE, concluded by 2010, was used in the system as excess reserves did not build, the second two tranches of QE II and III almost produced dollar for dollar change in the excess reserves. That resulted in about 2 ¾ trillion of the Fed’s QE having no effect in changing the output gap or dropping unemployment. Yet the Fed’s $4 trillion total balance sheet, most of increase being QE, has had impact on sector segmentation pricing and has induced “binding” which has the collateral value of the notes and bonds in QE being ever more important in pricing. https://research.stlouisfed.org/wp/2015/2015-002.pdf

But if the Fed is not in the midst of error then risky asset prices are very high now and the SP500 should trade at around 1400 area if the expected NGDP in the curve and forwards are forecasting the longest stretch of sub-par growth in the US in the nation’s history is our future.

Put simply, a 2 ¼% long bond is incompatible with a 2100 SP500 and it is pricing in periods of deflation.

Given the how fantastically grim these expected curves and NGDP are, I assume that it is monetary error ( I hope?) which given the clout and size of the Fed has been able to “paint the tape” to this date and could for a longer time. But given the size of the US economy it will sooner or later "roll over" the Fed, if the Fed does not correct. The error is sticky as now careers are attached in this very black view of the US, and if th US econ does roll over these monetary Malthusians, heads will roll. The first one to go would be Yellen. But I do not think the Fed is as strong as the BOJ was relative to the Japanese economy, where almost the same monetary policy resulted in 20 years of sub par growth to date.

For our portfolio this means we keep very close watch on the financials and we do not use the TLT or other long duration US Treasurys. This exposes us as the change to low negative correlation by US Treasurys during a business cycle downturn is a keystone for our portfolio. We are not alone - now the MetLifes and Bridgewater alike are finding it very difficult to use long duration US Treasurys which in the past were the keystone to either reaching excess return or provide an offset for business set backs. That is quite an issue for all nation's insurance, pensions, household savings, and banks.

This is a very severe monetary crisis - and hopefully just "monetary" and not a secular stagnation state that strikes to the core of the US economy.

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About Me

Many years of experience in being a market maker, a trader, a salesguy or portfolio manager in almost all asset classes known. Have had a high teens average career return and yet can say that I have lost more money in more asset classes than anyone I know.
My biggest curse is that not even wishing to become involved: "I see dead people.", as the kid said in the movie. I can smell a trade in the drawer or financial fraud or PL blowup miles away. Should have been with the FBI if wanted to max social utility.
Autodidact in all things math, formal education in history.